[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]






                 FINANCIAL INSTITUTION BANKRUPTCY ACT 
                                OF 2015

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                           REGULATORY REFORM,
                      COMMERCIAL AND ANTITRUST LAW

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                                   ON

                               H.R. 2947

                               __________

                              JULY 9, 2015

                               __________

                           Serial No. 114-35

                               __________

         Printed for the use of the Committee on the Judiciary

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      Available via the World Wide Web: http://judiciary.house.gov
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                       COMMITTEE ON THE JUDICIARY

                   BOB GOODLATTE, Virginia, Chairman
F. JAMES SENSENBRENNER, Jr.,         JOHN CONYERS, Jr., Michigan
    Wisconsin                        JERROLD NADLER, New York
LAMAR S. SMITH, Texas                ZOE LOFGREN, California
STEVE CHABOT, Ohio                   SHEILA JACKSON LEE, Texas
DARRELL E. ISSA, California          STEVE COHEN, Tennessee
J. RANDY FORBES, Virginia            HENRY C. ``HANK'' JOHNSON, Jr.,
STEVE KING, Iowa                       Georgia
TRENT FRANKS, Arizona                PEDRO R. PIERLUISI, Puerto Rico
LOUIE GOHMERT, Texas                 JUDY CHU, California
JIM JORDAN, Ohio                     TED DEUTCH, Florida
TED POE, Texas                       LUIS V. GUTIERREZ, Illinois
JASON CHAFFETZ, Utah                 KAREN BASS, California
TOM MARINO, Pennsylvania             CEDRIC RICHMOND, Louisiana
TREY GOWDY, South Carolina           SUZAN DelBENE, Washington
RAUL LABRADOR, Idaho                 HAKEEM JEFFRIES, New York
BLAKE FARENTHOLD, Texas              DAVID N. CICILLINE, Rhode Island
DOUG COLLINS, Georgia                SCOTT PETERS, California
RON DeSANTIS, Florida
MIMI WALTERS, California
KEN BUCK, Colorado
JOHN RATCLIFFE, Texas
DAVE TROTT, Michigan
MIKE BISHOP, Michigan

           Shelley Husband, Chief of Staff & General Counsel
        Perry Apelbaum, Minority Staff Director & Chief Counsel
                                 ------                                

    Subcommittee on Regulatory Reform, Commercial and Antitrust Law

                   TOM MARINO, Pennsylvania, Chairman

                 BLAKE FARENTHOLD, Texas, Vice-Chairman

DARRELL E. ISSA, California          HENRY C. ``HANK'' JOHNSON, Jr.,
DOUG COLLINS, Georgia                  Georgia
MIMI WALTERS, California             SUZAN DelBENE, Washington
JOHN RATCLIFFE, Texas                HAKEEM JEFFRIES, New York
DAVE TROTT, Michigan                 DAVID N. CICILLINE, Rhode Island
MIKE BISHOP, Michigan                SCOTT PETERS, California

                      Daniel Flores, Chief Counsel
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                            C O N T E N T S

                              ----------                              

                              JULY 9, 2015

                                                                   Page

                                THE BILL

H.R. 2947, the ``Financial Institution Bankruptcy Act of 2015''..     3

                           OPENING STATEMENTS

The Honorable Tom Marino, a Representative in Congress from the 
  State of Pennsylvania, and Chairman, Subcommittee on Regulatory 
  Reform, Commercial and Antitrust Law...........................     1
The Honorable Henry C. ``Hank'' Johnson, Jr., a Representative in 
  Congress from the State of Georgia, and Ranking Member, 
  Subcommittee on Regulatory Reform, Commercial and Antitrust Law    38
The Honorable Bob Goodlatte, a Representative in Congress from 
  the State of Virginia, and Chairman, Committee on the Judiciary    39
The Honorable Dave Trott, a Representative in Congress from the 
  State of Michigan, and Member, Subcommittee on Regulatory 
  Reform, Commercial and Antitrust Law...........................    40
The Honorable John Conyers, Jr., a Representative in Congress 
  from the State of Michigan, and Ranking Member, Committee on 
  the Judiciary..................................................    40

                               WITNESSES

Donald S. Bernstein, Esq., Partner, Davis Polk & Wardwell LLP
  Oral Testimony.................................................    43
  Prepared Statement.............................................    45
Stephen E. Hessler, Esq., Partner, Kirkland & Ellis LLP
  Oral Testimony.................................................    59
  Prepared Statement.............................................    61
Richard Levin, Esq., Partner, Jenner & Block LLP
  Oral Testimony.................................................    85
  Prepared Statement.............................................    87

                                APPENDIX
               Material Submitted for the Hearing Record

Response to Questions for the Record from Donald S. Bernstein, 
  Esq., Partner, Davis Polk & Wardwell LLP.......................   128
Response to Questions for the Record from Stephen E. Hessler, 
  Esq., Partner, Kirkland & Ellis LLP............................   132
Response to Questions for the Record from Richard Levin, Esq., 
  Partner, Jenner & Block LLP....................................   134

 
              FINANCIAL INSTITUTION BANKRUPTCY ACT OF 2015

                              ----------                              


                         THURSDAY, JULY 9, 2015

                       House of Representatives,

                  Subcommittee on Regulatory Reform, 
                      Commercial and Antitrust Law

                      Committee on the Judiciary,

                            Washington, DC.

    The Subcommittee met, pursuant to call, at 10:10 a.m., in 
room 2141, Rayburn House Office Building, the Honorable Tom 
Marino (Chairman of the Subcommittee) presiding.
    Present: Representatives Marino, Goodlatte, Farenthold, 
Collins, Walters, Ratcliffe, Trott, Bishop, Johnson, Conyers, 
and DelBene.
    Staff Present: (Majority) Anthony Grossi, Counsel; Andrea 
Lindsey, Clerk; and (Minority) Susan Jensen, Counsel.
    Mr. Marino. The Subcommittee on Regulatory Reform, 
Commercial and Antitrust Law will come to order.
    Good morning everyone. I apologize for the delay. We all 
have three or four things going on at once, starting at 7 in 
the morning. So without objection, the Chair is authorized to 
declare recesses of the Committee at any time. We welcome 
everyone to today's hearing on H.R. 2947, the ``Financial 
Institution Bankruptcy Act of 2015.'' I will now recognize 
myself for an opening statement.
    Last Congress, the Financial Institution Bankruptcy Act was 
reported favorably by this Committee and passed the House under 
suspension of the rules. This week, the legislation was 
reintroduced, and today, we build on last year's record by 
further examining the bill. In the wake of the financial crisis 
of 2008, Congress enacted the Dodd-Frank Wall Street Reform and 
Consumer Protection Act. That legislation was intended to 
address, among other things, the potential failure of large 
financial institutions.
    While the Dodd-Frank Act created a regulatory process for 
such an event, the Act states that the preferred method of 
resolution for a financial institution is through the 
bankruptcy process. However, the Dodd-Frank Act did not make 
any amendments to the bankruptcy code to account for the unique 
characteristics of a financial institution. The legislation 
before us today fills that void.
    The Financial Institution Bankruptcy Act is the product of 
years of study by industry, legal, and financial regulatory 
experts, as well as bipartisan review over the course of three 
separate Subcommittee hearings last Congress. The legislation 
includes several provisions that improve the ability of a 
financial institution to be resolved through the bankruptcy 
process. It allows for a speedy transfer of a financial firm's 
assets to a newly formed company. That company would continue 
the firm's operations for the benefit of its customers, 
employees, and creditors, and ensure the financial stability of 
the marketplace.
    This quick transfer is overseen by, and subject to the 
approval of an experienced bankruptcy judge, and includes due 
process protections for parties-in-interest. The bill also 
creates an explicit rule in the bankruptcy process for the key 
financial regulators. In addition, there are provisions that 
facilitate the transfer of derivative and similarly structured 
contracts to the newly formed company. This will improve the 
ability of the company to continue the financial institution's 
operations.
    Finally, the legislation recognizes the factually and 
legally complicated questions presented by the resolution of 
financial institutions. To that end, the bill provides that 
specialized bankruptcy and appellate judges will be designated 
in advance to preside over these cases.
    The bankruptcy process has long been favored as the primary 
mechanism for dealing with distressed and failing companies. 
This is due to its impartial nature, adherence to established 
precedent, judiciary oversight, and grounding in the principles 
of due process and the rule of law. We are here today as part 
of an effort to structure a bankruptcy process that is better 
equipped to deal with the specific issues raised by failing 
financial firms.
    As an original cosponsor of the bill, I look forward to 
hearing from today's expert panel of witnesses on the merits of 
the Financial Institution Bankruptcy Act and whether any 
further refinements to the bill are necessary. I now recognize 
the Ranking Member of the Subcommittee on Regulatory Reform, 
Commercial, and Antitrust Law, Mr. Hank Johnson, for his 
opening statement. Mr. Johnson.
    [The bill, H.R. 2947, follows:]
    
    
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                               __________
    Mr. Johnson. Thank you, Mr. Chairman. H.R. 2947, the 
``Financial Institution Bankruptcy Act of 2015,'' amends the 
bankruptcy code to establish a process for the expedited 
judicial resolution of large financial institutions to soften 
the disruptive effects of their collapse.
    I trust the courts and am sympathetic to the notion that a 
judicial process may be preferable to an administrative process 
for resolving systemically important financial institutions 
that present a risk to the economic stability of our Nation, 
but I'm concerned that the lack of a funding mechanism for H.R. 
2947 may make the bill unworkable.
    A key difference between an orderly resolution under Dodd-
Frank and the resolution contemplated by this bill concerns the 
proper mechanism for funding the reorganization of the debtor. 
In a typical bankruptcy case, the debtor's reorganization may 
be funded by private parties or by the Federal Government as 
illustrated by the General Motors bankruptcy.
    In many instances, liquidity provided by the U.S. 
Government to prevent the collapse of financial institutions 
has either returned a profit to the government or is likely to 
be repaid. The National Bankruptcy Conference (NBC), which 
includes the Nation's leading bankruptcy scholars and 
practitioners, explained in a letter to the Committee in June 
that, ``meeting the liquidity needs of a distressed financial 
institution is essential to successfully resolving the firm 
without creating undue systemic risk.''
    This critical mechanism has prevented the collapse of 
several major financial institutions without cost to the 
taxpayer. It is my understanding that this element does not 
currently exist in the bill for jurisdictional reasons. 
Nevertheless, I remain optimistic that the Chair will continue 
to work across party lines to accommodate these concerns prior 
to the bill's consideration on the floor.
    In addition to these concerns, I would caution the Chair 
against efforts to combine this bill with legislation that 
would strike Title II of the Dodd-Frank Act. Such efforts would 
be unacceptable and would meet strong opposition. As the 
National Bankruptcy Conference further noted, laws currently in 
place such as Title II of the Dodd-Frank Act should ``continue 
to be available even if the bankruptcy code is amended to 
better address the resolution of systemically important 
financial institutions'' because ``the ability of U.S. 
regulators to assume full control of the resolution process to 
elicit the cooperation from non-U.S. regulators is an essential 
insurance policy against systemic risk and potential conflict 
and dysfunction among the multinational components of these 
institutions.''
    Title II of the Dodd-Frank Act also serves as a valuable 
backstop to the bankruptcy process should this bill become law. 
Additionally, as the conference has also noted, it is important 
that financial regulators have a very significant role in the 
timely resolution of a financial institution regardless of 
whether by bankruptcy or orderly liquidation.
    As the Conference noted, the ``heavy involvement of U.S. 
regulators would be critical if adverse systemic effects from 
the failure of the systemically important financial institution 
are to be prevented or minimized.''
    It would be unwise to overlook the expertise of financial 
regulators who are charged with considering the impact of a 
resolution on the economy and financial markets in favor of a 
process that is intended to produce maximum returns to 
creditors while facilitating the debtor's reorganization.
    Thank you, Mr. Chairman, and I yield back.
    Mr. Marino. Thank you, Mr. Johnson.
    The Chair now recognizes the Chairman of the full Judiciary 
Committee, Congressman Goodlatte of Virginia for his opening 
statement.
    Mr. Goodlatte. Thank you, Mr. Chairman. I appreciate your 
holding this hearing.
    Our Nation's financial system provides the life blood for 
industry, small businesses, and our communities to develop, 
grow, and prosper. Ensuring that this system functions 
efficiently in both good times and bad is critical to the 
ongoing vitality of our economy. The recent financial crisis 
illustrated that the financial system and existing laws were 
not adequately prepared for the insolvency of certain 
institutions, which threatened the very stability of the global 
economy and our financial industry.
    There has been considerable debate over whether Congress' 
main response to the financial crisis--the Dodd-Frank Wall 
Street Reform and Consumer Protection Act--is adequate to 
respond to a future crisis. Today's hearing, however, is not 
focused on that debate. Instead, we turn our attention to the 
private and public efforts to strengthen the Bankruptcy Code so 
that it may better facilitate the resolution of an insolvent 
financial firm while preserving the stability of the financial 
markets.
    The subject of today's hearing, the ``Financial Institution 
Bankruptcy Act of 2015,'' is a reflection of these efforts. The 
bill is calibrated carefully to provide transparency, 
predictability, and judicial oversight to a process that must 
be executed quickly and in a manner that is responsive to 
potential systemic risk.
    Additionally, it incorporates the ``single point of entry'' 
approach, which a growing consensus of experts in public and 
private industry believes is the most effective and feasible 
method to resolve a financial institution that has a bank 
holding company. The Judiciary Committee has a long history of 
improving the Bankruptcy Code to ensure that it is equipped 
properly to administer all failing companies.
    The Financial Institution Bankruptcy Act adds to this 
history by enhancing the ability of financial firms to be 
resolved through the bankruptcy process. The development of the 
legislation before us today has been a collaborative effort 
that included the financial and legal community, Members of 
Congress on both sides of the aisle, the Federal Reserve, the 
FDIC, the courts, and Treasury.
    I applaud Congressman Trott for continuing the efforts of 
last Congress to strengthen the bankruptcy code and Chairman 
Marino for holding today's hearing on this important reform. I 
look forward to hearing from today's witnesses on the Financial 
Institution Bankruptcy Act and whether the passage of time has 
resulted in the need for any further revisions to the bill.
    And at this time it is my pleasure to yield the balance of 
my time to the gentleman from Michigan, Mr. Trott, the chief 
sponsor of the legislation for any opening remarks that he 
might have.
    Mr. Trott. Thank you, Chairman. I also want to thank 
Chairman Marino and Ranking Member Johnson for holding this 
hearing, and also thank our witnesses for again providing their 
insight on this bill.
    The health of our financial institutions, particularly 
large multinational players, is critical to not only our 
economy but also our citizens. Consequently, how we react when 
a systemically important financial institution fails is of 
particular concern.
    The Financial Institution Bankruptcy Act of 2015 seeks to 
address those concerns and put in place a better process. The 
bill amends the bankruptcy code so as to allow the insolvency 
of a financial institution to be resolved through the Chapter 
11 process. The Chapter 11 process provides rules that are 
designed to accomplish an equitable and predictable resolution 
of competing claims.
    Chapter 11 is a relatively efficient process, and the 
integrity and transparency ensured by due process protections 
will reduce the risk to our overall economy and reduce the 
potential of a taxpayer funded bailout.
    As an aside, my hometown is Detroit, Michigan, and I am 
here to tell you that the bankruptcy process can add great 
value to difficult financial situations that undermine our 
economy and our communities.
    Thank you again, Chairman. I yield back my time.
    Mr. Goodlatte. And I yield back. Thank you, Mr. Chairman.
    Mr. Marino. Thank you, Chairman.
    The Chair recognizes the full Judiciary Committee Ranking 
Member, Congressman Conyers from the State of Michigan for his 
opening statement.
    Mr. Conyers. Thank you, Mr. Chairman and Members of the 
Committee. I join in congratulating my colleague from Michigan, 
Mr. Trott, for his authorship of the measure that is before us. 
I support it, and I am a cosponsor of it. As a matter of fact, 
there are a number of reasons for my support.
    Number one, the bill addresses a real need, recognized by 
regulatory agencies, bankruptcy experts, and the private sector 
that the bankruptcy law must be amended so that it can 
expeditiously restore trust in the financial marketplace as 
soon as possible after the collapse of a major financial 
institution.
    Many of us recall the failure of Lehman Brothers in 2008 
which caused a worldwide freeze on the availability of credit, 
which not only affected Wall Street but Main Street as well.
    The near collapse of our Nation's economy because of 
Lehman's failure revealed that current bankruptcy law is ill 
equipped to deal with complex financial institutions in 
economic distress. H.R. 2947 would establish a specialized form 
of bankruptcy relief under Chapter 11 of the Bankruptcy Code by 
which the holding company of a large financial institution 
could voluntarily use or be forced to use by the Federal 
Reserve Board, under certain conditions.
    The debtor's operating subsidiaries would continue to 
operate outside of bankruptcy while the debtor's principal 
assets--such as secured property, financial contracts, and the 
stock of its subsidiaries--would be transferred to a temporary 
bridge company. The bridge company, under the guidance of a 
trustee, in turn, would liquidate these assets to pay the 
claims of the debtor's creditors.
    The legislation would also impose a temporary stay to 
prevent parties from exercising their rights in certain 
qualified financial contracts. Each critical step of this 
process would be under the supervision of a bankruptcy judge 
and subject to the right of appeal.
    Another reason for my support is that it appropriately 
recognizes the important role of the Dodd-Frank Act in the 
regulation of large financial institutions. Without doubt, the 
Great Recession was a direct result of the regulatory 
equivalent of the Wild West. In the absence of any meaningful 
regulation of the mortgage industry, lenders developed high 
risk subprime mortgages and used predatory marketing tactics 
targeting the most vulnerable.
    These doomed-to-fail mortgages were then securitized and 
sold to unsuspecting investors, including pension funds and 
school districts. The ensuing 2008 crash froze credit and 
trapped millions of Americans in mortgages they could no longer 
afford, causing waves of foreclosures, massive unemployment, 
and international economic upheaval.
    The Dodd-Frank Act goes a long way toward reinvigorating a 
regulatory system that makes the financial marketplace more 
accountable and hopefully more resilient. In particular, Title 
II of Dodd-Frank establishes a mandatory resolution process to 
wind down large financial institutions, which is a critical 
enforcement tool for bank regulators to ensure compliance with 
the Act's heightened regulatory requirements.
    Nevertheless, Dodd-Frank clearly recognizes that bankruptcy 
should be a first resort and that Title II's orderly resolution 
process should be a last resort. In fact, Title I of the Act 
explicitly requires these companies to write so-called living 
wills that must explain how they will resolve their financial 
difficulties in a hypothetical bankruptcy scenario. This is 
because bankruptcy law has, for more than 100 years, enabled 
some of the Nation's largest companies to regain their 
financial footing, including General Motors and Chrysler 
Corporations.
    But to be a truly viable alternative to Dodd-Frank's 
resolution process, the bankruptcy law must be amended to 
facilitate the rapid administration of a debtor's assets in an 
orderly fashion that maximizes value and minimizes disruption 
to the financial marketplace.
    And finally, I am pleased to note that this bill is the 
product of a very collaborative, inclusive, and deliberative 
process, which I hope would be more regularly employed in this 
Congress and not the exception when it comes to drafting 
legislation.
    While an excellent measure, H.R. 2947 unfortunately does 
not include any provision allowing the Federal Government to be 
a lender of last resort, which nearly every expert recognizes 
is a necessary element to ensure financial stability. I 
recognize, however, that this is an issue not within the 
Committee's jurisdiction but more within the area of the 
jurisdiction of the Financial Services Committee.
    I welcome the witnesses, particularly Mr. Levin, and I 
thank the witnesses for their participation here today, and I 
yield back the balance of my time.
    Mr. Marino. Thank you, Congressman Conyers.
    Without objection, other Members' opening statements will 
be made part of the record. The Chair will begin by swearing in 
our witnesses before introducing them. Would you please rise 
and raise your right hand.
    Do you swear that the testimony you're about to give before 
this Committee is the truth, the whole truth, and nothing but 
the truth, so help you God?
    Let the record reflect that the witnesses have answered in 
the affirmative. Thank you. Please be seated.
    I will now introduce each of the witnesses before anyone 
gives their opening statement. Mr. Don Bernstein is a partner 
at Davis Polk, where he heads the firm's insolvency and 
restructuring practice. During his distinguished 35-year 
career, he has represented nearly every major financial 
institution in numerous restructurings, as well as leading a 
number of operating firms through bankruptcy, including Ford, 
LTV Steel, and Johns Manville. Mr. Bernstein has earned 
multiple honors for his practice, including being elected by 
his peers as the chair of the National Bankruptcy Conference, 
the most prestigious professional organization in the field. 
Mr. Bernstein received his A.B. (Cum laude) from Princeton 
University and his JD from the University of Chicago Law 
School. Thank you, Mr. Bernstein, for being here
    Mr. Stephen Hessler is a partner in the restructuring group 
of Kirkland & Ellis. His practice involves representing 
debtors, creditors, and investors in complex corporate Chapter 
11 cases, out-of-court restructurings, acquisitions, and 
related trial and appellate litigation. In addition to 
practicing law, Mr. Hessler is an author and frequent lecturer 
on a variety of restructuring related topics, including, as a 
professor at the University of Pennsylvania, where he teaches a 
restructuring class to both law school and Wharton students. 
Mr. Hessler has been recognized by both Chambers and 
Turnarounds & Workouts as an outstanding restructuring lawyer. 
Mr. Hessler received his BA and JD from the University of 
Michigan, where he served as the managing editor of Michigan's 
Law Review. Welcome.
    Mr. Richard Levin is a partner in the Bankruptcy, Workout 
and Corporate Reorganization Practice of Jenner & Block. Mr. 
Levin is the current chair of the National Bankruptcy 
Conference, a fellow of the American College of Bankruptcy, and 
a lecturer of bankruptcy law at the Harvard Law School. In 
almost 40 years of practice, Mr. Levin has gained a reputation 
as one of the foremost restructuring, bankruptcy and creditor/
debtor rights lawyers. Notably, Mr. Levin served as a 
bankruptcy counsel to the House Judiciary Committee and was one 
of the principal authors of the 1978 U.S. Bankruptcy Code. Mr. 
Levin received his undergraduate degree from MIT and his JD 
from Yale Law School where he served as editor of Yale Law 
Review. Welcome, Mr. Levin.
    Mr. Levin. Thank you, Mr. Chairman.
    Mr. Marino. Each of the witnesses' written statements will 
be entered into the record in its entirety, and I ask each of 
the witnesses to summarize their statements, you've been 
through this before, in 5 minutes or less. To help you stay 
within your time, you see the lights in front of you, but as I 
do, when I'm sitting at that table making a statement, I'm 
concentrating on making my statement and not watching the 
lights.
    So what I will politely and diplomatically do if it gets 
too far over the 5 minutes, is I will reach for the gavel and 
just sort of raise it to get your attention, and ask you to 
succinctly come to a close in your statement.
    I'm going to recognize our witnesses for their opening 
statement. Mr. Bernstein.

            TESTIMONY OF DONALD S. BERNSTEIN, ESQ., 
               PARTNER, DAVIS POLK & WARDWELL LLP

    Mr. Bernstein. Thank you, Chairman Marino, and thank you, 
Chairman Goodlatte, and also Congressman Trott for introducing 
and being a sponsor of the bill, as well as Congressman 
Conyers. I want to say that you have made my job easy in terms 
of meeting the 5-minute requirement because the statements were 
so good in terms of summarizing the bill. I'm just going to 
skip to my major points
    So, just as a little bit of background, this idea of single 
point of entry resolution of a financial firm is a result of a 
lot of work that's been done at the FDIC and in other contexts, 
including under Title II of Dodd-Frank, with the idea that if 
you set up financial institutions correctly in the United 
States with bank holding companies, you should be able to 
recapitalize their operations if the operations have losses 
because there is loss absorbency at the holding company level.
    And in fact, there are a number of features that are being 
added to the way bank holding companies are structured in order 
to facilitate resolution under the Bankruptcy Code, which has 
been an outgrowth of the resolution planning process under the 
Dodd-Frank Act. One of these is a concept that is being adopted 
globally, which is called, ``Total Loss Absorbing Capacity.''
    That consists of two things. It consists of the capital of 
the bank and also a layer of debt that can effectively be 
bailed in or converted, in effect, to equity so that no capital 
needs to be infused from sources outside the firm, including no 
taxpayer funds would have to be infused to create the capital 
necessary.
    The capital levels of financial institutions since 2008, 
especially the largest ones, have essentially doubled from 
where they were in 2008, and then if you add a requirement that 
is in the process of being developed and is likely to be 
imposed by regulators for total loss absorbing capacity, it 
will double again in effect and permit the use of bankruptcy 
and single point of entry resolution to use that loss absorbing 
capacity in order to resolve firms.
    Most of the largest financial institutions actually have 
that layer of indebtedness already, so we are actually at a 
point where the resources are available to recapitalize these 
firms.
    Secondly, there has been a massive increase in the amount 
of liquidity that's being maintained by all the firms. 
Congressman Conyers made the point about a liquidity source. I 
know the NBC makes that point in their letter and I make it as 
well in my testimony, my written testimony, but today, with the 
levels of liquidity that the banks are maintaining, they can 
resolve themselves in a severely adverse economic scenario 
based on the balance sheet liquidity that they are currently 
maintaining. So that is--and it's a huge increase from the way 
it was in 2008.
    The third area that single point of entry requires is a 
clean holding company, a holding company that can be left 
behind in a bankruptcy proceeding when the operating 
subsidiaries have been recapitalized and then get transferred 
to a bridge company. And pursuant to regulatory requirements 
and also pursuant to the resolution planning process, the firms 
are also putting themselves in a place where they are not 
having material operations occurring in the holding company 
where there is little or no short-term debt in the holding 
company, and subsidiaries are not guaranteeing holding company 
debts. So that is another aspect of how the companies are 
putting themselves in a position to actually utilize the single 
point of entry process.
    And finally, because the amendments that are in section 
1188 of the proposed bill have not been enacted, there has been 
a very strong effort by both regulators and by the firms to 
amend financial contracts to remove cross defaults to a holding 
company bankruptcy so that the financial contracts cannot be 
terminated the way they were in Lehman Brothers and can 
continue in effect, of course with appropriate protections for 
counterparties, because the guarantees would be moved to the 
new bridge company and would therefore not be subject to the 
debt that's been left behind in the old bankrupt company.
    So all of those features, and there were some others that I 
mention in my written testimony, are putting things in a 
position to actually accomplish single point of entry.
    Now, there were two provisions in the bill that I wanted to 
mention that I think are worth just highlighting. The first one 
is the ability of the Federal Reserve to commence an 
involuntary case. One of the difficulties that's been raised 
with that provision is involuntary cases normally come with the 
right to oppose them and other parties need to be heard by the 
court, there might be appeals, and in my view, if the due 
process issues are so overwhelming with respect to that issue, 
it's not critically necessary to include that provision.
    And I see you raising your gavel, so what I will do is wait 
for questions if there are questions on that issue or on the 
other provision that I wanted to address. Thank you.
    Mr. Marino. Thank you, Attorney Bernstein. See it works 
very subtilely.
    [The prepared statement of Mr. Bernstein follows:]
    
    
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                               __________
    Mr. Marino. Attorney Hessler, please.

            TESTIMONY OF STEPHEN E. HESSLER, ESQ., 
                 PARTNER, KIRKLAND & ELLIS LLP

    Mr. Hessler. Thank you. Chairman Marino, Chairman 
Goodlatte, Ranking Member Johnson, Ranking Member Conyers, 
other Members, thank you for inviting me to testify at today's 
hearing.
    As noted in your very kind introduction, I'm a partner in 
the restructuring group of Kirkland & Ellis, LLP. Although my 
practice includes representing creditors, equity holders, and 
other constituencies in complex distressed matters, I mostly 
represented major corporations as company counsel in some of 
the largest and most challenging bankruptcies in history. I am 
speaking especially from that perspective this morning.
    I am distinctly pleased to appear before this Subcommittee 
again regarding the Financial Institution Bankruptcy Act of 
2015, also known as Subchapter V. It was my privilege to 
testify in July 2014 in support of the prior version. Given the 
comprehensive record scrutinizing Subchapter V, I will not 
repeat my prior testimony and will instead this morning focus 
on two issues.
    First, the comparative benefits of a judicial process such 
as Chapter 11 versus a regulatory process such as Title II of 
the Dodd-Frank Act for addressing a major bank's failure, and 
second, how the 48-hour delay of the qualified financial 
contract safe harbors from the automatic stay is critical to 
the effectiveness of Subchapter V.
    Turning to the first issue. The touchstone analytical 
framework for evaluating Subchapter V should not be as a stand-
alone proposal, but rather, as compared to Chapter 11 in its 
current form, Chapter 11 as amended by Subchapter V and Title 
II. Among these alternatives, Subchapter V is the best designed 
option both structurally and philosophically to advance the 
private and public policies that animate the reorganization of 
a financial corporation.
    The hallmarks of an optimal resolution regime for failing 
SIFIs must be clear and established rules administered by an 
impartial tribunal. Subchapter V is a financial corporation 
specific supplement to the existing reorganization provisions 
of Chapter 11 of the Bankruptcy Code. And thus, it builds upon 
decades of practice and precedent that have refined the code 
and that otherwise provide a well tested and proven successful 
reorganization framework for major corporations, including 
SIFIs and their stakeholders.
    Importantly, Subchapter V does not directly preclude or 
supplant the potential applicability of Title II. Critically, 
however, by design and operation, the availability of 
Subchapter V will make it far less likely that Title II will 
ever be invoked.
    Turning to my second point. As a general rule, upon a 
debtor commencing a Chapter 11 case, contract counterparties 
are automatically stayed from terminating their agreements and 
engaging in self-help remedies against estate assets, but the 
Bankruptcy Code currently provides that counterparties to so-
called qualified financial contracts, such as derivatives, 
repurchase, and swap agreements enjoy a so-called safe harbor 
from the automatic stay.
    Consequently, a Chapter 11 filing by a financial 
corporation with significant qualified financial contracts 
could be chaotic at the outset as counterparties that are not 
subject to the automatic stay proceed to terminate and enforce 
their rights in the debtor's assets. Subchapter V addresses 
this potential problem by precluding access to these safe 
harbors for 48 hours after the commencement of the case, which 
is consistent with the time period under Section 1185 for 
effecting the transfer of the subsidiary operating assets which 
include qualified financial contracts to the bridge company 
under the single point of entry approach highlighted by Mr. 
Bernstein.
    I have previously criticized Title II for imposing too 
brief a stay on this front until only 5 p.m. Eastern on the 
business day following the FDIC's appointment as receiver, and 
as a general matter, my default position remains that safe 
harbors should not exist at all. That said, for the following 
four reasons, I am persuaded that Subchapter V proposes a 
workable construct in this context.
    One, since passage of the Dodd-Frank Act in 2010, financial 
corporations have had 5 years to draft and refine their living 
wills. Ideally, the enactment of Subchapter V will reinforce 
the need to be prepared to make expedited qualified financial 
contract transfer and assignment decisions.
    Two, Subchapter V requires that decisions on whether to 
transfer and assign all of the debtor financial corporation's 
assets, expressly including qualified financial contracts, must 
be made within 48 hours. It logically follows that 48 hours is 
a sufficient period to stay qualified financial contract 
counterparties from taking remedial actions that would 
interfere with these determinations.
    Three, the implicit expectation of Subchapter V is that 
essentially all qualified financial contracts will be 
transferred to the bridge company. Because Subchapter V 
precludes cherry-picking only certain qualified financial 
contracts for assignment, this should reduce the burden of 
having to make transfer determinations for every individual 
agreement.
    Lastly, the most likely alternative to a Subchapter V case, 
which is Title II, proposes a shorter stay than 48 hours, and 
Chapter 11 without Subchapter V provides for no stay at all on 
qualified financial contract counterparty termination. This 
means Subchapter V's 48-hour stay is actually the most robust 
option under the current and potential SIFI insolvency regimes 
at issue.
    I look forward to further careful consideration of the 
important issues addressed by Subchapter V. I thank the 
Subcommittee for allowing me to share my views on this 
legislation, and I welcome the opportunity to answer any 
questions about my testimony.
    Mr. Marino. Thank you, Attorney Hessler.
    [The prepared statement of Mr. Hessler follows:]
    
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    Mr. Marino. Attorney Levin, did I--am I pronouncing it 
correctly? Levin or Levin?
    Mr. Levin. It is Levin, Mr. Chairman
    Mr. Marino. Levin. I apologize for the mispronunciation.
    Mr. Levin. Not a problem.
    Mr. Marino. Please, your opening statement.

               TESTIMONY OF RICHARD LEVIN, ESQ., 
                  PARTNER, JENNER & BLOCK LLP

    Mr. Levin. Thank you. Thank you, Mr. Chairman. Thank you 
for your kind introduction. I thank the Members of the 
Subcommittee for their attention here today.
    I want to reiterate that as chair of the National 
Bankruptcy Conference, I am speaking here today only on behalf 
of the Conference, not on behalf of my own views or the views 
of my law firm, Jenner & Block, or the views of any clients of 
Jenner & Block.
    You have our written statement, Mr. Chairman, which I 
understand will be included in the record. It covers many more 
things than I will address today orally, but I want to 
highlight a few points.
    First, I would like to describe that the National 
Bankruptcy Conference is in general agreement with what Mr. 
Bernstein and Mr. Hessler have already said. There is a lot 
of--as there is within the Subcommittee--there is a lot of 
agreement within the financial and bankruptcy community about 
many terms of this bill. It was very carefully crafted and 
constructed to address many of the concerns that had been 
addressed, especially with respect to financial contracts.
    That said, the National Bankruptcy Conference, which 
generally supports bankruptcy legislation, has concerns about 
the workability of this legislation considered in an isolated 
form. But what has happened over the last several years since 
the financial crisis is that many other structures have arisen 
that make this bill much more workable than it would have been 
had it been enacted say in 2009 or 2010, the single point of 
entry concept development, the provisions in financial 
contracts that provide for nontermination upon the guarantor's 
or the parent guarantor's bankruptcy and many other things that 
Mr. Bernstein and Mr. Hessler have addressed, but the 
Conference nevertheless is concerned about the workability of 
this legislation.
    We do not oppose it. We are not, I will say, vigorous 
supporters of it. We are, I think, mild supporters of the 
legislation as a good alternative for the reasons that Mr. 
Hessler just described. But let me describe the few concerns 
that we have.
    One is that the, the regulators in every other financial 
area of stockbrokers, insurance companies, usually have the 
speed and the agility and the expertise to take over and 
resolve a distressed financial institution. Here we are talking 
about the holding companies where the regulators, in normal 
times, have a lot of expertise. Bankruptcy courts do not have 
that expertise. They are going to be asked to move very quickly 
over what we call a resolution weekend. We all recognize that 
things have to move that fast. And we think that therefore the 
regulators should continue to play a major role in this 
process.
    The judicial supervision is useful for transparency and due 
process, we agree with that, but we do not believe that given 
the speed that is required and the time it takes to get 
educated about the intricacies and complexities of these 
institutions that all of this can be put upon even a well 
trained bankruptcy judge and that the regulatory role is still 
very important in the process.
    We believe it's also important because of cross border 
issues. Regulators in other countries are much more comfortable 
dealing with the regulators that they have worked with for 
years in supervising these institutions rather than with an 
unknown bankruptcy judge who might be every bit as qualified 
and capable as the regulators but is not a known quantity and 
therefore would create uncertainty and therefore risk.
    So the next point is that--the point on involuntary 
petitions. We are concerned about due process with the amount 
of time that is available to deal with involuntary petitions, 
and we favor the voluntary route. I think we can witness the 
Lehman experience, which in a voluntary petition works, that we 
don't need a regulator in a voluntary because the regulators 
have enough tools to persuade management and a board of 
directors that a voluntary petition is necessary. So we support 
the idea of voluntary use of Subchapter V.
    We are concerned about the lender of last resort issue. We 
know that's outside this Committee's jurisdiction, so I won't 
spend much time on it other than to say we think its 
availability will obviate the need for its use, and that's an 
important point.
    And finally, we do support the provision in this bill, 
which was not--which has not been in some other proposals, that 
this proceeding take place before bankruptcy judges who are 
expert in financial reorganization rather than before the 
district court who does not have the same expertise as the 
bankruptcy court.
    With that, Mr. Chairman, I'm happy to address any questions 
the Committee might have.
    Mr. Marino. Thank you, Attorney Levin.
    [The prepared statement of Mr. Levin follows:]
    
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                               __________
    Mr. Marino. The Chair will now start by asking questions of 
the panel, and I ask my colleagues to keep their questions at 5 
minutes or less and give you ample time to answer
    Mr. Bernstein, I would like to start with you for a moment. 
We know that banks have increased their liquidity reserves, but 
if a bank were to fail and the bridge company--would the bridge 
company still have to receive some type of loan to cover the 
issue concerned, or do banks have enough liquidity to keep 
those loans at a minimum?
    Mr. Bernstein. Thank you. At current liquidity levels, 
which have been enhanced since 2008, the banks have used severe 
stress testing of those liquidity models in a resolution 
context, and they show that they do have enough liquidity. I 
agree with Mr. Levin's point that if there were a liquidity 
backstop, it wouldn't be used, but having it there would help 
to stabilize the firm more quickly simply because it exists.
    So I think the need for--there is no need for liquidity 
because of the current balance sheet levels, but having a 
liquidity backstop would serve the purpose of helping to 
facilitate the resolution and getting the company to be 
stabilized more quickly to give the market confidence.
    Mr. Marino. Thank you. Attorney Hessler, you stated in your 
last, I think, testimony about your reservations concerning the 
single point of entry approach, and have you come up with an 
alternative to that? Would you please explain that in a little 
more detail? I did it get it in your opening statement, but 
could you elaborate on it, please?
    Mr. Hessler. Sure. I have not come up with an alternative 
way, but I would say--and this was emphasized in my testimony 
submitted for today. Over the last year since my testimony last 
summer, I spent significant additional time contemplating the 
bill, and I am at this point comfortable with the single point 
of entry approach, and I guess very quickly I'll tick off four 
reasons why I think it is----
    Mr. Marino. Please.
    Mr. Hessler [continuing]. A viable construct.
    First of all, a point that was highlighted by Mr. Bernstein 
in his opening statement. SIFIs have corporate structures that 
don't comport with conventional bankruptcy practice. Many of 
the operating subsidiaries either cannot be filed for 
bankruptcy or need to be liquidated in a regulatory proceeding.
    So Subchapter V, the single point of entry approach 
actually facilitates and accommodates the unique corporate 
structure of systemically important financial institutions.
    The second point is while the discreet steps of single 
point of entry may be a unique addition to Chapter 11, the 
transfer determination, that in and of itself is subject to 
Bankruptcy Code and bankruptcy court approval within well 
established and applicable law under the legal principles of 
sections 363 and 365 of the Bankruptcy Code.
    The third point is more of a practical matter, which is, 
again, although single point of entry would be a novel addition 
to the Bankruptcy Code, as already noted, versions of this very 
rapid sale have been happening already. Lehman is the most 
extreme example, which was the sale of all the operating assets 
within, you know, four to 5 days of the petition, but there 
have been other sort of lightning fast with the ``melting ice 
cube sales'' that are already happening under the Bankruptcy 
Code, and so understood, the single point of entry approach 
actually just formalizes and codifies something that's already 
going on.
    And then lastly, and I talk about this at great length in 
my testimony, if you actually walk through the expectations of 
various creditors, secured creditors, unsecured creditors, and 
equity interest holders, the distributional scheme that is 
effected by single point of entry is consistent with typical 
Chapter 11 principles.
    Mr. Marino. Thank you. Attorney Levin, you talk about the 
regulators having a role in this, and I do agree that they 
should have a role in this, but their decisions, in part, are 
subjective. How can we assure that at least their subjective 
findings are going to be consistent? I have a concern when so 
many subjectivity is involved in this situation by someone who 
is not a judge or an experienced bankruptcy judge, please.
    Mr. Levin. Fair point, Mr. Chairman. I'd note, however, 
that in a lot of these areas, even in the bankruptcy courts, 
the decisions are discretionary, and therefore, to a large 
degree, subjective. The courts set out broad rules for what 
kinds of transactions are permitted, but within those broad 
rules, there is tremendous subjectivity in their application. 
And I would note that the regulators themselves have begun 
adopting regulations on how this process would work, so it is 
controlled as well. If you have the combination of the 
regulators and the bankruptcy court supervising this process, I 
think you get the best of both worlds in that area.
    If I might follow up on Mr. Hessler's last----
    Mr. Marino. Quickly, please
    Mr. Levin [continuing]. Remark. There is a real--there is a 
dividing line that's very important in the single point of 
entry concept. The dividing line is the transfer of the 
operating assets to the bridge company.
    From that point, what goes on in the bankruptcy case is 
purely bankruptcy. It's not regulatory. It's not financial 
institution. The financial institution has been moved to the 
bridge company, and the bridge--what's going on in the bridge 
company is totally outside of the bankruptcy realm. It should 
be a healthy operating financial institution that will be 
subject to regulatory control.
    I think Subchapter V, meaning no pun, bridges that nicely 
and separates them and therefore works to facilitate both 
systems in due process and transparency and protection of 
creditors and protection of systemically important--protection 
of the system with a systemically important financial 
institution, and that, I think, addresses the fourth of Mr. 
Hessler's points that he made.
    Mr. Marino. Thank you. My time is expired. The Chair 
recognizes the Ranking Member, the gentleman from Georgia, 
Congressman Johnson.
    Mr. Johnson. Thank you. Mr. Levin, in a letter that the NBC 
sent to our Subcommittee last month, the conference stated that 
any amendments to the Bankruptcy Code relating to the 
resolution of SIFIs should make it clear that regulators retain 
Title II's orderly liquidation authority despite the pendency 
of bankruptcy.
    Does H.R. 2947 sufficiently ensure that regulators retain 
their Title II authority, notwithstanding the pendency of the 
bankruptcy?
    Mr. Levin. Yes. I haven't--the bill was introduced this 
week, and I haven't had a chance to review it, but my 
understanding was that it does not affect the regulators' other 
authorities for liquidation.
    Mr. Johnson. All right. Thank you. Can a Subchapter V 
operate as intended if there is no secured lender of last 
resort such as the Federal Government?
    Mr. Levin. Possibly. It's a far riskier proposition. Mr. 
Bernstein notes that the banks are far better capitalized now 
than they were 6 or 7 years ago, very true. I would expect that 
a SIFI that winds up in Subchapter V probably would not be as 
well capitalized as most banks are today, and therefore, there 
would be a need for liquidity. That liquidity might be supplied 
by the recapitalization of the subsidiaries when they are 
transferred over to the bridge company and they're 
recapitalized by contribution of the parent from the assets, 
but at the same time it might not be adequate and therefore 
liquidity could be important.
    To the extent it's a bank subsidiary, the Federal Reserve 
discount window provides that. To the extent it's a broker/
dealer or an insurance company or another kind of financial 
institution such as a derivatives trading institution, there is 
no apparent source of liquidity, and that could create risk in 
the bridge company.
    As I said earlier, and this is the important point to 
stress, the market is less likely to run if it knows the 
liquidity facility is there than if there isn't one. If the 
market knows that the liquidity facility is there, people will 
feel protected, and therefore, there will be less need for a 
liquidity facility. I sometimes characterize it as akin to our 
nuclear arsenal. The fact that we have it means that we don't 
have to use it.
    Mr. Johnson. Thank you. Mr. Hessler, your response to that 
same question?
    Mr. Hessler. I agree with the general thrust of Mr. Levin's 
response. I think it's possible that the absence of the Federal 
funding mechanism would not impair the ability of the bridge 
company to operate effectively because of the recapitalization 
that occurs upon the transfer of the assets. To the extent that 
is otherwise available, though, that could be reassuring to the 
market.
    Mr. Johnson. Thank you. Mr. Levin, in a letter that the NBC 
sent to our Subcommittee last month, the conference described 
several significant concerns. Among them, the NBC stated that 
under certain circumstances the bankruptcy process might not be 
best equipped to offer the expertise, speed, and decisiveness 
needed to balance systemic risks against other competing goals 
in connection with resolution of systemically important 
financial institutions and thus Title II of Dodd-Frank should 
be retained even if H.R. 2947 becomes law.
    And as you've stated, it appears that this legislation does 
retain--or I mean, it doesn't repeal it, so I mean, legislation 
is retained, but there is an ability of the regulators to 
assert authority during the pendency of the Subchapter V 
action. Please describe what types of companies or 
circumstances might warrant the application of Title II's 
orderly liquidation authority in lieu of a resolution in 
bankruptcy?
    Mr. Levin. Subchapter V would address most of the problems 
that Title II would address. The fact that it was there and 
Dodd-Frank says that bankruptcy is the preferred alternative 
might make bankruptcy workable and probably will make 
bankruptcy workable in that circumstance. But none of us is 
prescient enough to know all of the bad things that could 
happen in a rapidly evolving crisis. And I don't have a 
specific answer for the particular circumstances that might 
require a different regulatory regime than Subchapter V, but 
what is called the triple key entry for Title II as well as the 
statutory preference for bankruptcy, we think it's useful to 
have that backup which would only be used in the most extreme 
circumstances, which are difficult to imagine and lay out at 
this point.
    The fact is, the banks are well capitalized now. Things are 
going pretty well. This is not likely to be used for many 
years. We don't know what the system will look like several 
years from now if and when it ever becomes necessary for a SIFI 
to be resolved in a crisis situation. So that--I think that is 
what lies behind our position more than any specific 
circumstances.
    Mr. Johnson. All right. Thank you, and I yield back.
    Mr. Marino. Thank you. The Chair now recognizes the Vice-
Chairman of the Subcommittee on Regulatory Reform, the 
gentleman from Texas, Mr. Farenthold.
    Mr. Farenthold. Thank you very much, Mr. Chairman.
    And actually Mr. Levin has a great lead in to my question. 
We are a bunch of lawyers up here that spend a lot of time 
looking at this and getting into the weeds. I want to take a 
step back and look at the big picture of this.
    We recently enacted Dodd-Frank, which is a very burdensome 
regulatory scheme, which went--from what I hear from a lot of 
banks and from a lot of people, seeking to borrow from banks. 
We got a situation where just recently we had the increased 
liquidity rules that we've been talking about. We really are 
looking at a very worse case scenario, something that none of 
us can imagine at this point.
    Can--maybe Mr. Bernstein, can you give me an idea? What 
kind of bankruptcy events are we talking about here?
    Mr. Bernstein. Yes. So I actually think this is less 
related to the facts on the ground at the time of any 
particular resolution than it is to--it's, frankly, almost a 
foreign policy issue. In the context of my practice, I've been 
dealing a great deal with foreign regulators.
    Foreign regulators do not understand bankruptcy. The main 
benefit and the primary benefit, I think, of retaining Title II 
is to give confidence to foreign regulators that if something 
is going wrong in the bankruptcy process, the regulators do 
have the ability to step in. Simply because they deal with the 
U.S. regulators every day, there is active dialogue with them, 
they think they understand where the U.S. regulators are coming 
from, so it's not necessarily something that will need to be 
used because this bill actually has the appropriate process.
    But in terms of preventing a foreign regulator from seizing 
a foreign subsidiary when we're trying to keep them out of 
bankruptcy, it may go a long way in giving the regulator 
confidence that they don't have to do that because they know 
that the U.S. regulators can step in.
    Mr. Farenthold. All right. Now, again, I think we're kind 
of get into the weeds now. And then again, this may be a little 
bit off topic of the bill, but would all of you agree that we 
really are dealing with a worse-case scenario situation here, 
something that is very--is not foreseeable at this point, would 
anybody disagree with that on the panel? I see no one does, so 
let me go on to my second question and----
    Mr. Levin. I don't disagree with that, but as I said a 
moment ago, Mr. Farenthold, had anybody asked us this question 
in the 1990's, we would have given the same answer.
    Mr. Farenthold. Okay. Let me go on to my second question. 
Mr. Hessler--or did you want to weigh in on this first?
    Mr. Hessler. There is one thing that I think would be 
hopefully clarifying about the interrelationship between Title 
II and Subchapter V. So nothing in Subchapter V diminishes 
Title II.
    Mr. Farenthold. Right.
    Mr. Hessler. It doesn't touch it. However, I think it's 
important that Subchapter V also be examined on its own merits 
because there's a critical provision, which is Section 1184, 
which provides standing to Federal Government regulators to be 
involved in a bankruptcy case. That presently does not exist 
within Chapter 11.
    Mr. Farenthold. And obviously the taxpayers could 
potentially be left holding the bag if the Federal regulators 
aren't----
    Mr. Hessler. Well, the decision on that, the Federal 
Government at present can only participate in a bankruptcy case 
to the extent it is a creditor----
    Mr. Farenthold. Right.
    Mr. Hessler [continuing]. Not the debtor. So the point I 
want to make is sort of irrespective of Title II and what it 
does and doesn't provide or the future of Title II, whether it 
has one or not, just within Subchapter V, it specifically and 
on its own provides that critical grant of standing for Federal 
regulators to advance their public interest mandates in a 
Chapter 11 case.
    Mr. Farenthold. Got you. All right. My other question is, 
one of the objections we're hearing to Subchapter V is it 
actually increases the incentive for private regulation, which 
I would guess is say the creditors putting more creditor 
favorable terms, you know, regulations are by the creditors 
rather than by the government.
    Do you believe the bill increases the incentive for the 
creditors of banks to put in these more burdensome requirements 
for the banks or no?
    Mr. Hessler. Subchapter V? No, I think--I actually believe 
that it puts a disincentivization for risky creditor behaviors. 
Creditors understand Chapter 11. It's well established and the 
governing principles are highly effective and highly proven. I 
actually think it's Title II, which is much more of an unknown 
quantity and an unknown entity that actually increases creditor 
uncertainty as to how a Title II untested proceeding would go, 
so I actually think Subchapter V, which really just adds 
additional clarifying facets to Chapter 11, I actually believe 
that's helpful for maximizing responsible creditor behavior.
    Mr. Farenthold. And Actually Mr. Bernstein wants the weigh 
in on this as well.
    Mr. Bernstein. Yes. I think the one thing about whether 
it's the provisions of this bill or the fact that the FDIC has 
made it clear that holding company creditors rather than 
taxpayers will absorb losses, that will increase the level of 
monitoring by creditors, and they will be making decisions 
about whether to invest based on how they see the institution 
operating rather than based on the feeling that they are going 
to be bailed out.
    And I think that is a very important aspect of this bill. 
It is probably a good thing.
    Mr. Farenthold. Thank you very much. I see my time has 
expired, Mr. Chairman.
    Mr. Levin. If I may add, Mr. Chairman, the fact that the 
ISDA has adopted this protocol that provides a stay in the 
financial contract itself of 48 hours shows exactly the 
opposite kind of creditor behavior. The creditors are helping 
to facilitate the process.
    Mr. Farenthold. Thank you.
    Mr. Marino. Thank the Chair recognizes the Ranking Member 
of the full Judiciary Committee, Congressman Conyers.
    Mr. Conyers. Thank you, sir. Mr. Levin, the National 
Bankruptcy Conference states regulators should not have the 
power to commence an involuntary Subchapter V. Do you have any 
reasons to let us know why the Conference takes this position?
    Mr. Levin. Yes, Mr. Conyers.
    Mr. Conyers. Please.
    Mr. Levin. An involuntary petition is like any lawsuit. It 
entitles the defendant, here the alleged debtor, to a defense. 
The amount of time necessary available for a resolution, we 
call it the resolution weekend, is so short that there really 
can be no meaningful defense. And there can be no meaningful 
appeal if the transfer process to the bridge company is to 
occur over a resolution weekend in response to an involuntary 
petition. So we think it undercuts due process to allow an 
involuntary bankruptcy petition.
    As I said earlier in my openings statement, we believe the 
regulators have enough tools at their hands to persuade a board 
of directors why it is important to file a voluntary petition 
at the beginning of a resolution weekend, rather than go 
through the contested in voluntary process. And we think that 
will suffice to protect the system.
    Mr. Conyers. Thanks. Now Subchapter V, could it operate as 
intended if there is no secured lender of last resort, Mr. 
Levin, such as the Federal Government. How would you respond to 
those who would say that this could amount to a taxpayer funded 
bailout of Wall Street people.
    Mr. Levin. We don't think it is a bailout because of the 
nature of lender-of-last-resort funding. Lender-of-last-resort 
funding has three requirements; one, that there be good 
collateral so that the lender, whether it is the Federal 
Reserve, or the Federal Government, or whether it is some other 
Federal corporation or agency is fully protected by the 
collateral it receives.
    The second is that the interest rate be what is referred to 
in literature as a punitive interest rate so that it is higher 
than--so there is no desire to access it for convenience. And 
for a moment I'm drawing a blank on the third and I'm going to 
ask Mr. Bernstein to help me on the third requirement.
    Mr. Bernstein. Above market interest rate.
    Mr. Levin. That was----
    Mr. Bernstein. You already said that? Then I don't remember 
the third one.
    Mr. Conyers. All right, two then.
    Mr. Levin. In any event, the point is this is not a bail 
out in the sense that the Federal Government or any agency is 
contributing money, taking an equity position, taking an equity 
risk. This is helping the financial institution take valuable 
assets that it has and make them liquid until those assets can 
be sold in a orderly market, rather than be dumped at fire sale 
prices and depress the market for everybody.
    Mr. Conyers. Well, do you think that by allowing it--if 
there is no secured lender of last resort--that we may be in 
some ways rewarding irresponsible behavior?
    Mr. Levin. I don't think a bankruptcy is a reward for 
irresponsible behavior whether or not there is a lender of last 
resort.
    Mr. Conyers. Now, going to Mr. Bernstein for his response 
to this question. If Subchapter V was in existence when Lehman 
failed, would it have achieved a better result with respect to 
the case's impact on the Nation's financial marketplace?
    Mr. Bernstein. It is a complicated question because many 
other things that are in place today weren't in place at that 
time. I think one of the things that it would have helped is 
this bill would have potentially permitted Lehman to adopt a 
different strategy. It could have used a single point of entry 
strategy and could have preserved its derivative contracts.
    The problem with Lehman at the time, though, is it didn't 
have the total loss absorbing capacity and might not have been 
able to recapitalize the subsidiaries. So that piece of it, 
which is now being required, not only in the U.S. but by global 
regulators, is very important. And if you have both of those 
pieces, the provisions in this bill or in the contractual ISDA 
to protocol, plus the total loss absorbing capacity, you would 
have had a totally different result in Lehman Brothers, I 
think.
    Mr. Conyers. So your answer is a substantially yes.
    Mr. Bernstein. That's correct, your Honor. Your Honor--
Congressman.
    Mr. Conyers. Thank you. Thank you, Mr. Chairman.
    Mr. Marino. Thank you. The Chair recognizes the gentleman 
from Michigan, Congressman Trott.
    Mr. Trott. Thank you, Chairman.
    Mr. Levin, so you raised a few concerns, one concern was 
the lack of experience potentially in a bankruptcy judge and 
the need for regulators to be involved. Didn't like the 
involuntary provision, which I agree with your comments in that 
regard. The lender of last resort concerns and then I think 
also then the need for experienced judges, not district judges.
    So the first concern is what surprised me a little bit. You 
know, Dodd-Frank came upon us in 2010, the FDIC has been 
working on rules for single point of entry since then. So you 
have, you know, you believe regulators are going to be able to 
act more efficiently and quickly because of their experience 
than a bankruptcy judge?
    Particularly under section 298 we have one of the 10 
experienced bankruptcy judges has been appointed for this 
purpose to deal with complex insolvency. I don't know if I 
understand why you have more confidence in the ability of 
regulators to move quickly and react than a bankruptcy judge 
who essentially does it every day?
    Mr. Levin. I'll tell you that the Conference had the view 
back in 2009 and 2010 of great concern about the regulators 
being able to do what you just described. But I think we've all 
learned a lot in 5 years, and the regulators have learned a 
lot. And we've watched them evolve in their thinking and learn 
and write regulations so they are in a much better position now 
to deal with this kind of circumstance than they would have 
been 5 or 6 years ago. But with that said, I want to go back to 
what I said in my opening statement. I think Subchapter V gives 
us the best of both worlds.
    The bankruptcy judge does not have enough knowledge about 
the company to be able to do it alone--the regulator--and does 
not have enough knowledge about the systemic affects of 
whatever is done. The regulators do not have the same process 
and remove that a bankruptcy judge has. And by combining the 
efforts of the two of them, I think you get a much better 
result than one alone. And this applies only to the resolution 
weekend and the transfer to the bridge. That's where the 
important difficult decisions have to be made. After that 
happens, the bankruptcy judge is fully well qualified to handle 
all of the rest of the case.
    Mr. Trott. Okay. Appreciate that clarification. Mr. Hessler 
made a comment about uncertainty as it relates to Title II. Mr. 
Levin, you made a comment, it will be many years before this 
perhaps even comes into play and we don't know, you know, how 
things will play out and how soon the provisions will be 
interpreted.
    Would you agree with Mr. Hessler's comments that the same 
can be said of Title II.
    Mr. Levin. Oh, yes, definitely. I mean there are parts of 
the Bankruptcy Code, Subchapter IV of Chapter 11 railroad 
reorganization is very rarely used, one case recently, nobody 
could have envisioned in 1978 what a Chapter 9 of Detroit might 
have looked like in 2013. So we have to think way into the 
future, and there's going to be uncertainty whichever way we 
go.
    Mr. Trott. Mr. Bernstein, so let's say H.R. 2947 was in 
place and we have a Lehman type insolvency. Can you just 
discuss for a moment how that would have played out 
differently?
    Mr. Bernstein. Yes. And this relates to Congressman 
Conyers' question. I think if we had this bill, plus all the 
other changes that are being made in the resolution planning 
process, I think we would have had an extremely different 
outcome in Lehman Brothers. Lehman Brothers holding company 
would have filed, the subsidiaries would have been 
recapitalized so that they would have sufficient capital not to 
go into bankruptcy.
    The subsidiaries would have been transferred to a new 
bridge holding company. And the derivatives contracts 
importantly would not have terminated, which would avoid 
enormous losses that would threaten the viability of those 
subsidiaries. So there wouldn't have been the systemic 
disruption that occurred at the time of Lehman Brothers, which 
is very important.
    Mr. Trott. So to that point I got delivered yesterday a 
copy of Hoover institute's book on making failure feasible. I 
read their mission statement in terms of the resolution 
project. And it said if a clear and credible measure can be put 
in place that convinces everyone that failure will be allowed, 
then expectations of bailouts will disappear. If we get rid of 
the risk reducing behavior that are fostered by guarantees, 
then that would be a good thing. And then also a clear process 
to reduce panic, H.R. 2947 would have accomplished that in 
Lehman?
    Mr. Bernstein. Yes, it would have. In fact, as you'll see 
in that Hoover book, there are several chapters devoted to this 
type of single point of entry resolution and their conclusion 
is it would be very effective in that way.
    Mr. Trott. It is a fascinating book, I'm not too far into 
it yet.
    But Mr. Hessler, one quick question, I am out of time. 
Ranking Member Johnson raised a concern about the funding. So 
back to Lehman, you know, the professional fees in Lehman were 
$2 billion, I believe. Can you just speak for a moment on 
funding concerns specifically as it relates to Ranking Member 
Johnson and this bill?
    Mr. Hessler. Yeah, I think it is what Mr. Levin is 
hopefully clarifying for me. There are two funding questions at 
issue in Subchapter V proceeding. Upon the transfer of the 
assets to the bride company, it is the access to liquidity of 
the bridge company.
    Mr. Trott. We've talked about that plenty.
    Mr. Hessler. That's not governed by Subchapter V because 
that is not in the jurisdiction of the bankruptcy. There is 
potentially the issue of for the purposes of finding the wind 
down----
    Mr. Trott. Do you have any concerns in that regard?
    Mr. Hessler. No. There is regular DIP lending capacity and 
there that will be a significantly more limited funding need 
because what at issue the wind down of undesirable assets. 
That's what's happening in the Chapter 11 case upon single 
point of entry transfer.
    Mr. Trott. Thank you, sir.
    Mr. Hessler. Thank you.
    Mr. Marino. The Chair now recognizes the Congresswoman from 
the State of Washington, Ms. DelBene.
    Ms. DelBene. Thank you Mr. Chairman. Thanks to all of you 
for being here with us today. Some of my questions were asked 
already, but I just had a quick question for you Mr. Hessler on 
living will requirements and I just wondered what your thoughts 
were on this legislation in terms of whether or not it would 
help facilitate the Dodd-Frank living will requirements?
    Mr. Hessler. I believe it will. I think the living will 
practices today have already begun to put in place the road map 
for what a Subchapter V proceeding would look like. And I think 
this is a point I want to augment that we've been talking how 
would Lehman have looked under a Subchapter V proceeding, and 
thus far really all that we have focused on is what would the 
cause have looked have looked like once it's filed.
    The one thing I'd want to mention to the Committee is from 
what we do in the vast majority of our work is spent preparing 
debtors for a soft landing into bankruptcy. So perhaps the most 
important consideration that I would urge lawmakers to keep in 
mind is with legislation what sort of incentives and 
disincentives does it put in place for directors and officers 
to confront restructuring challenges and begin to prepare and 
address those issues as early as possible.
    And this is something I talked about in my testimony. Title 
II has the provision that directors and officers are 
effectively all wiped out, the are all going to get fired and 
compensation is going to get clawed back and it's sort of all 
types of punitive measures. I actually think that creates a 
disincentive for directors and officers to begin taking 
responsible actions that are otherwise necessary to maximize 
stakeholder recoveries in a bankruptcy.
    And so I think that's a very important part in Subchapter V 
I think it very, very hopefully incentivizes management to 
begin to prepare for bankruptcy because it sees an orderly path 
forward to otherwise affect a resolution of a failing bank.
    Mr. Levin. We sometimes refer to what Title II does as 
requiring management to sign its own death warrant.
    Ms. DelBene. Any other feedback on that one?
    Mr. Bernstein. I think this bill would definitely 
facilitate structures already being used in the living wills of 
the largest financial institutions and I think that that is a 
very positive development.
    Ms. DelBene. Thank you. Thank you Mr. Chair. I yield back.
    Mr. Marino. Thank you, the Chair recognizes the gentleman 
from Texas, Congressman Radcliffe.
    Mr. Radcliffe. Thank you, Chairman. I would also like to 
thank my friend and colleague, the gentleman from Michigan, 
Congressman Trott for his work on this issue.
    The 2008 financial crisis hurt a lot of folks in Northeast 
Texas. And some of the families in my district are frankly 
still working to get back on solid financial footing. And I'll 
be the first to admit that I'm not an expert on bankruptcy 
issues. But following that crisis I think it became obvious to 
all of us that these technical, complicated bankruptcy issues 
are having a huge impact on everyday Americans. And issues that 
impact everyday Americans are the ones that we as policymakers 
certainly want to make sure that we're addressing.
    There were a lot of questions and frustrations that have 
come out of the financial crisis. For example, why did 
distressed financial firms receive government bailouts, instead 
of being forced to seek resolution through the bankruptcy 
process? Now I know in the years since this crisis this 
Committee has worked very hard to improve the Bankruptcy Code 
and make sure that it is equipped to handle all failing 
companies. I appreciate all of you witnesses being here today 
to provide your expertise on the proposed legislation. I want 
to find out whether it is in fact going to achieve its intended 
goal.
    So I want to kick things off by asking about a provision in 
the bill that would allow the Federal Reserve to initiate a 
bankruptcy case over the objection of a financial institution.
    Now, a lot of folks in my district have a real distrust of 
the Federal Reserve. They see it as a dangerously powerful 
body, one with little oversights and little transparency. So if 
you gentleman were chatting with my constituents about possibly 
giving the Federal Reserve this new authority, how would you 
allay their concerns? And what would you tell them about how 
this new authority would help them?
    Mr. Bernstein. Yes, there is a lot of uncertainty as a 
financial crisis develops and boards of directors may hesitate 
to act. I do not believe that the Federal Reserve will end up 
ever using the power if they are granted the power to file 
involuntary petitions, because the fact that the Federal 
Reserve can do it if it's necessary will cause corporate 
managements to be very focused on when the right time to go 
into Chapter 11 is. And that, taken together with the living 
will process, I think the two together make it very unlikely it 
will ever be used. And it is really only a failsafe for a 
situation where the company management may be paralyzed at that 
time.
    That being said, I don't think it is an essential part of 
this bill for the reasons that Mr. Levin stated, which is there 
are other supervisory powers that the Federal Reserve has. And 
the Federal Reserve is going to be intimately involved in the 
living will process, and they have been, so I think there is 
going to be a constant dialogue with the regulators and the 
financial institutions that make this provision almost 
unnecessary.
    Mr. Radcliffe. Mr. Hessler.
    Mr. Hessler. Yeah, no, I would add to that. I think the 
involuntary provision is an unhelpful distraction to what is 
otherwise a very good bill. Already there are provisions in the 
Bankruptcy Code that provide creditors the express right to 
file an involuntary case against a debtor to commence an 
involuntary Chapter 15. Those are exceedingly rare and the 
reason they are is debtors are very aware of those creditor 
powers and they are usually already very engaged in dialogue 
with the creditors, debtors do not like to get tossed into 
bankruptcies on a timeline and terms that are not of their own 
making. So they will file voluntarily before involuntary can be 
initiated. I fully expect that's what would happen here in the 
context of SIFIs, that they would be well aware of what Feds 
otherwise can do and even without the express involuntary 
rates, the Feds could probably force a bankruptcy anyway, and 
the company is going to file in advance of that so that it can 
maintain control of its own case.
    Mr. Radcliffe. Mr. Levin, anything you'd like to add? I 
will give you a chance.
    Mr. Levin. Nothing to add. The Conference agrees with both 
of those.
    Mr. Radcliffe. Terrific. Mr. Hessler, I spend a 
considerable amount of my time these days listening to 
constituents who have to deal with the immense burdens and 
expense of complying with Dodd-Frank. Personally I'd like to 
get rid of Dodd-Frank all together, but at the very least I 
would like to see us moving forward with respect to solving 
some of its challenges.
    So let me ask you this, in your opinion, would the bill 
before the Committee today reduce the necessity for regulators 
to initiate a Title II resolution proceeding under Dodd-Frank?
    Mr. Hessler. Yes, it would. I addressed it in my testimony 
and in my opening statement. I think the availability of 
Subchapter V will effectively render the need for a Title II 
unnecessary.
    Mr. Radcliffe. Mr. Bernstein, will you comment on that?
    Mr. Bernstein. I agree, I agree with Mr. Hessler.
    Mr. Radcliffe. Thank you. I see that I'm out of time and I 
yield back.
    Mr. Marino. Seeing no other Congressmen or women, this 
concludes today's hearing. I want to thank the witnesses for 
attending, I want to thank our guests for attending. And each 
time I have an opportunity to listen to you gentlemen I learn 
something so thank you very much for today's testimony.
    Without objection, all Members will have 5 legislative days 
to submit additional written questions for the witnesses or 
additional materials for the record.
    This hearing is adjourned.
    [Whereupon, at 11:30 a.m., the Subcommittee was adjourned.]
                            A P P E N D I X

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               Material Submitted for the Hearing Record

 Response to Questions for the Record from Donald S. Bernstein, Esq., 
                   Partner, Davis Polk & Wardwell LLP
                   
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  Response to Questions for the Record from Stephen E. Hessler, Esq., 
                     Partner, Kirkland & Ellis LLP

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    Response to Questions for the Record from Richard Levin, Esq., 
                      Partner, Jenner & Block LLP

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                                 [all]